The effect of O2 on the NO–CO reaction over Pd/Al2O3 and Ag–Pd/Al2O3 has been studied by in situ infrared (IR) spectroscopy coupled with the O2 pulse technique at 373–573 K. Pulsing O2 into the NO–CO flow at 373 K causes the oxidation of Pd+–NO to gaseous NO2 over Pd/Al2O3 and the emergence of Pd0–NO on Ag–Pd/Al2O3. The formation of Pd0–NO during the O2 pulse over Ag–Pd/Al2O3 catalyst suggests that (i) O2 disrupts the Ag overlayers on the Pd surface, allowing the Pd surface to be exposed to NO; and (ii) Ag species is able to keep the Pd surface in reduced state in the presence of O2. Increasing the temperature to 573 K does not lead to the formation of Pd+–NO, over Ag–Pd/Al2O3 further supporting the unique ability of Ag to keep Pd in the reduced state under an oxidizing environment. Ag enhances NO oxidation and slow down CO oxidation on Pd/Al2O3. Adsorbed oxygen on Ag–Pd/Al2O3 exhibits two distinctly different reactivities: (i) a more active adsorbed oxygen reacting with NO, giving a sharp NO2 response and (ii) a less active species with, respect to NO, oxidizing CO, giving a trailing CO2 response. Ag is unable to alleviate the negative impact of O2 on the NO–CO reaction over Pd/Al2O3. Keeping Pd in the reduced state is not a necessary condition for nullifying the impact of O2 on the NO–CO reaction.